Home Equity Loan Lowdown

Home Equity Loans Are Passé

--By Priya Jestin, Staff Writer

Time was when just about everybody worth his home, took a home equity loan. These loans were the most popular means for homeowners with a mortgage to borrow. The main attraction was the low interest rate and the tax-deductible nature of the interest. While these loans are still good, they may not be the best solution to your problems.

While the housing boom was on, these loans made very good sense. However, now, interest rates on short-term home-equity lines of credit have sharply increased. And this, at a time when the housing market is at its lowest ebb.

This leaves homeowners with a very small cushion to fall back on should they be unable to repay the money they borrowed. If you plan to take a home-equity loan, first determine when you will need the money and how soon you will be able to repay it. This will help you get a better deal.

Before You Take That Loan

Taking a loan is the easiest part of a deal. Making plans to repay the loan and ensuring that you repay on time, is the big headache. In the case of a home equity loan, it not only constitutes a headache but also a fear of losing your home. So, before you enter into any agreement, you must first consider how you will pay back the money you borrow.

Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But in this case, the portion that goes toward principal may not be enough to repay the principal by the end of the term. There are other plans that allow payment of interest alone during the life of the plan. One thing you should remember is irrespective of your payment mode, you should have made preparations to pay off the loan. Federalreserve.gov reports:

Whatever your payment arrangements during the life of the plan--whether you pay some, a little, or none of the principal amount of the loan--when the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this "balloon payment" by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.

Read more: When your home is on the line

Avoiding The HELOC Trap

Now may be just about the worst possible time to take money from your home. And quite a few economists have taken on the role of doomsayers as they predict a really bad recession. At such a time, a loan against your home is a surefire way to lose your home. One of the biggest risks is that our home is a collateral for the loan. So if we default, well, we’ll not only be broke but also out on the streets. One way to avoid something so drastic is to leave some breathing room for ourselves. For instance, after accounting for your primary mortgage and your HELOC, you should have a decent value of your home still available as equity. This helps us prepare for the unexpected.

However, I still think the best way is to not touch that home unless absolutely necessary. Before we tap into our home’s equity, we could try other methods of raising money. One of the most popular methods of getting money is to borrow from your 401(k). Usually, most retirement plans will allow you to borrow funds from them. You will have to repay it with interest over time. And it works out better than a credit card loan because the interest rates are much lower.

Alternately, you could also borrow from your life insurance policy. But that is possible only if you have a whole life policy. Then you can access the cash balance for personal needs while you’re still alive. Another benefit is that you may not have to pay back the loan.

In Michigan, Home Rates Rise Slower Than Loan Rates

Second mortgages and home-equity credit lines are on the upswing in Michigan, as they are across the nation. But here, they come at a dangerous price, as median property values in the state aren't increasing as they are elsewhere in the United States. Freep.com reports:

The Census Bureau released data for publication today showing that Michigan's median home values rose 19% in the last five years, compared with a national average of 32%. Meanwhile, 19% of Michigan homes have a second loan on them. Nationwide, 17% do.

Read more: CENSUS 2006: Home owners risking big debt

I Want That Kitchen… Puhleeez

If you come to my home any time in the near future and don’t find it smart enough, blame the rising mortgage rates in the country! I’ve been wanting to do up my home for quite some time now, but would those rates just stop ticking? No Sirreee! And so here I am waiting for the day when my modern kitchen and designer bathroom don’t haunt my dreams but become realities.

And if housing-industry analysts are to be believed, things are only going to get worse. I think we should shoot all these doomsayers and interest rate setters. That way, we can do what we want. But until such a day, I’ll have to let the kitchen and bathroom haunt me.

Borrow Smart

Feel the need to take a home equity loan? Well, by all means you can go ahead and take that loan, only don’t be in too much of a hurry. That will only induce mistakes. And mistakes are one thing you just cannot afford, what with the interest rates going through the roof. What you need to do is not just borrow but borrow smart. Here are a few tricks you can employ to ensure that you get a good deal:

• Compare: This is something I insist on. Whether it is a loan or an insurance policy, always compare rates. It is a free market and you should be able to take advantage of the competitive streak among lenders. In the case of a home equity loan, the rate you get will depend a lot on your credit score. So if you have a really good credit score – 760 and above – you can easily get a home-equity line of credit for half a point below the prime rate. However, if your credit is not too good, you may have to pay nearly 5 points or more over prime.
• Know the rules: You must have heard from many sources that home equity loans are better than most other loans because you can deduct the interest. Not True—well not always. Another thing is that even if you do get a deduction, your tax break will be limited to interest on loan amounts of $100,000 or less. So if you’ve borrowed more than this stipulated amount, the interest you pay on the excess amount will no be deducted.
• Reflect: It is important to realize that when you take a loan against your home’s equity, you are risking your biggest investment. So borrow only if you absolutely must because when you are ready to sell off your home, you may not get as much as expected.
• Avoid: Using a home equity loan to pay off your credit card debts. Here, you will only be addressing an immediate problem and not its root cause. And you could end up being deeper in debt.

Piggyback Loan – Not Lucrative Anymore

There are quite a few things that your mortgage professional will not tell you about. Don’t worry they are not trying to hide these facts, they just don’t know. High up on the list of don’t knows is the fact that piggyback loans are not as good as mortgage insurance. But before we get into details, let’s explain a piggyback. Simply put, a piggyback is described with three numbers that should add up to 100. An 80-10-10 piggyback is one where you get a mortgage for 80 percent of the price, borrow 10 percent as an equity loan or credit line, and make a 10 percent down payment.

There was a time when home equity lines of credit were cheap – they came at 4 or 5 percent. Then, piggybacks were almost always cheaper. However, now with the rates almost doubled, piggyback loans are no longer lucrative as they have higher monthly payments.

Noose’s Tightening… Can You Escape?

Times have never been so bad for homeowners both existing and aspiring. Some of them get trapped into taking adjustable rate mortgages and are then stuck with higher payments. So, they try to wriggle out of the situation by tapping into their home’s equity. And what do you know? Home equity loan rates have surged from 4.5 percent to 8.25 percent and home values have stopped rising and even fallen in some markets. This means taking out a loan against your home’s equity is no longer a viable option.

And then there are those who have already taken out loans against their home’s equity. They are now faced with the too real proposition of losing their homes. Most of these homeowners also have huge credit card debts, which makes their situation even more precarious. Already nationwide mortgage delinquencies (mortgages where one or more payments have been missed) are up slightly from a year ago. However, the worst may be yet to come.

Unable to Pay Interest on Your Home Equity Lines? You Could Lose Your Home!

Foreclosures are a painful reality in Bay Area as increasing numbers of homeowners are in danger of losing their homes. These people are finding themselves unable to pay their home mortgages or sell for enough money to cover their loans. Nearly 3,000 homeowners in the nine-county Bay Area got default notices from their mortgage lenders in the April-through-June period.

According to experts, rising interest rates are one of the main causes of the growth in foreclosure. Most homeowners have some kind of debt, usually home equity lines of credit or credit card debts. And now, since the interest rates on home equity lines have risen sharply, homeowners are feeling the pinch. The prime rate -- which governs the rates on most equity loans -- is up to 8.25 percent. Mercurynews.com reports:

Californians currently have an outstanding balance of nearly $79 billion on their home equity lines of credit, according to Loan Performance, a San Francisco company that tracks loan data for the mortgage industry. Homeowners in the San Jose metro area have about $5.1 billion worth of debt on their home equity credit lines.

Read more: Bay Area foreclosures spike; still near historic lows

Consumers weighed down by interest rates

Home equity loans and home equity lines of credit (Heloc) are some of the most popular types of loan facility available today and most people still borrow loans on their homes for purposes like funding a child’s college education or refurbishing the home and other needs. However, if your debts are too big and you also owe money on your home equity line of credit, you just might feel weighed down by higher interest rates.

Most people obtained their loans when the rates were supposedly very low, so low that even if you didn’t need a loan, you went out and got one because it was too good to miss. And now your once-great loan packages have suddenly become too hot for you to handle. If you were one of those who managed to get a home equity line of credit at say a 4 percent interest rate in 2004, you are probably now making payments with a rate that's doubled.

So, you are in a bad shape now and you want to do something to correct your situation. But that doesn’t mean you should do something that could eventually hurt you. Quite a few people try to roll your credit line into a mortgage – something that may not suit everybody. Some homeowners mistakenly believe that they will get relief by rolling their debt into new 30-year fixed-rate mortgages. Before embracing this idea, you need to evaluate whether you really want to relinquish your current home loan. Remember, if you swap your old loan for a new one, you will have to pay a higher interest rate.

Tried low-rate home equity loans yet?

Want some serious cash in a hurry without risking everyting in the process? Try a low rate home equity loan -- there is very little risk involved and it comes from the funds that you have already put into your home. Livearticles.org reports:

Make sure that the low rate home equity loan that you are signing up for is going to stay at the rate that you are signing up for. In some cases the companies reserve the right to raise the rate as they see fit and that can mean a good many bad things.

Read more: How to Get Low Rates on Home Equity Loan

Interest rates make home equity loans unattractive

A short while back, home equity loans and home equity lines of credit were lucrative sources of funds with exceptionally low interest rates. Now, as interest rates rise to unimaginable levels, investors are concerned about what to do with these credit lines. Suntimes.com reports:

Here's a basic rule of thumb: When the HELOC rate gets to 7 percent or more, pay off the line. That's comparable to getting a guaranteed 7-percent-plus rate of return on your investments. (Do note that paying off your HELOC debt doesn't close the line. It will still be available in case of emergencies.)

Read more: Prime rate pulls rug from under home-equity loan

Do you want to keep your home equity line of credit?

If you have a home equity line of credit, you are probably wondering whether you should keep the credit line, or refinance it. This is a pretty tricky and confusing question, since the rate has almost doubled in the past one year. Until two years ago, home equity lines of credit were great deals. Homeowners had access to money at rates that were lower than those on fixed-rate home equity loans or first-lien mortgages.

However, these good times couldn’t have continued for ever. The fact that credit lines are indexed to the prime rate meant that every time the Federal Reserve raises short-term rates, borrowers' minimum monthly payments go up. Since 2004, the rates have been raised so many times that now the prime rate has gone up from 4 percent to 7.75 percent! There are very few options before borrowers now. They can keep the credit line, pay it off and replace it with a fixed-rate home equity loan, or do a cash-out refinance on the first-lien mortgage and pay off the credit line with the proceeds.

Tax and home-equity loans

You’ve taken that home-equity loan and it is tax time again. So how do you calculate the percentage of the interest that is tax deductible when filing income tax returns? When calculating the exact amount of deductible interest on home-equity loans, you have to take into consideration a few variables. These include your filing status, the fair-market value of your home, origination dates of previous mortgages and remaining debt.

Another thing you can do is get a copy of IRS Publication 936, Home Mortgage Interest Deductions. This publication will provide you with a detailed explanation of how such calculations are made. It also includes a flowchart that will help you know if all or part of your equity interest is deductible. You can either pick up a copy at your nearest federal building or download one. The next best thing you can do to know your tax-deductible interest is get yourself a good accountant who will help you calculate the exact tax-deductible amount.

Know the costs of taking a home-equity loan

If you are looking for a convenient way to borrow money look no further than your home. A home-equity loan is one of the easiest ways to get a good loan at an attractive rate of interest – one that is better than that offered by credit cards and other types of loans. The best part? You get to deduct the interest when you file your taxes. That’s just looking at the rosy side of things. While a home equity loan is great, you cannot take the first loan you get without shopping around. You are leveraging your home for cash and this is no small decision. It is important for you to know the different types of home-equity loans available and also about various other factors before you can take a decision.

One of the first things you need to ask is how much the loan is going to cost you. Remember, the interest for a home equity loan is fixed and is variable for a home-equity line of credit. So based on your means and needs, you will have to choose the type of loan you want to take. Another thing you need to know is that in case you want to pay off your debt before the agreed date, you will have to pay a fee for doing so. This is true of both home-equity loans and home-equity lines of credit.

Next, you have to check the fees of taking a loan. This includes costs like attorney fees, title search, document preparation and insurance. In case of a home-equity line of credit, you may have to pay a transaction fee each time you make a withdrawal. In case you don’t use your line of credit for longer than a stipulated time period, you may even have to pay an inactivity fee. Some lenders waive closing costs and certain other fees. So it is important that you check if your lender offers you such a facility.

Rising rates make home equity loans dearer

Here’s official confirmation of a trend that has seen a cooling off towards the once upon a time favorite home equity loans. Consumers are finally beginning to feel the heat from the interest rates, which have been steadily rising for the past two years. According to certain lenders, homeowners are now backing off their borrowings under home equity lines of credit. These loans have been costing more with each hike by the Federal Reserve.

Rates on home equity loans are tied to the prime lending rates of banks, which in turn follow the Fed’s benchmark rate. This means a slight rise in the latter will make the loans dearer. Of course, there was a time when home equity loans cost less than home mortgages, and this prompted many people to turn the equity in their houses into piggy banks. Now, since these loans cost more than traditional 30-year mortgages, their popularity ratings are dropping fast.

Banks offer Best Home Equity Plans

Due to the increasing interest rates, the growth of home equity borrowing has witnessed a sharp fall in the recent years. Keeping this in mind, lenders are unveiling plans that will help the borrowers to the get the best out of it. U.S. Bank, a unit of U.S. Bancorp introduced a home-equity loan with a rate of 5.99 percent that is fixed for 20 years. J. P. Morgan Chase & Co. reduced the interest rate by half a percentage point for the borrowers on its home-equity lines of credit. The new low interest rate home equity loans are available to the borrowers in five states: New Jersey, Illinois, Connecticut, Michigan and Ohio.

Other banks are also not lagging behind. They roll out plans to offer home equity loans to their customers at a competitive price. Wachovia Corp.'s "win back" program is offering a rate of prime minus 1 percent to certain borrowers who previously paid off their home-equity loans. azcentral.com reports:

Home-equity lending has boomed in recent years as record numbers of Americans have taken advantage of low rates and rising home values to fund their spending needs or pay off high-cost debt. Borrowing against home values added $600 billion to consumers' spending power last year, according to Federal Reserve calculations, with about one-third of that sum coming from home-equity loans and lines of credit.

Home Equity Loans are less than Credit Card Loans

Home Equity loans always cost less than the credit card loans. Individuals, who have their own homes and facing financial problems due to credit card payments, can take home equity loan to repay the existing debts. As home equity loans charge lower interest rates, more people are taking the benefits of this loan. Home Equity is basically a second mortgage on your home. To take loans, you will be required to present your home as a collateral.

In such a case, the lenders can seize and sell your home if you do not make the payments in future. Because equity loans are secured by a property, the lender takes less risk than with unsecured loans such as credit cards. Home Equity loans have low interest rates something between 6 to 7.5 percent. sunherald.com reports:

With a line of credit, you are authorized a maximum amount to borrow, and you can take any amount up to that limit any time you want. HELOCs typically provide borrowers with checkbooks and debit cards. Your monthly statement will show the current debt and minimum payment required, just as a credit-card statement would.